Both the debtor and the creditors are bound by the terms of the Chapter 12 plan upon confirmation of the plan by the court. The confirmation of a plan does not discharge all debts but confirms the ongoing credit relationship between the parties during the life of the plan. The debtor must make the plan succeed by making regular fixed payments to the chapter 12 trustee. The trustee will distribute the funds in accordance with the terms of the plan to the debtor’s creditors.
In order to make regular payments, the debtor will require adjustment to living on a fixed budget for the period of his bankruptcy. A debtor cannot incur any new debt without permission from the trustee, since this may lessen the debtor’s ability to complete the payment plan. The debtor is entitled to retain property as long as payments are made.
To make a plan work, a debtor has to make Priority payments in full, unless the creditor allows otherwise. If priority payments can’t be paid in full, then the debtor must use all disposable income to make payments over a five year period. The debtor must pay at least the value of the collateral for secured debts, but not necessarily the full amount of the debt. Unsecured creditors are usually paid for less than the full amount of their debt, but they must receive at least what they would have gotten in chapter 7 liquidation.
If the debtor fails to make the payments, the case may be dismissed. Additionally, the court may dismiss the case or convert the case to a liquidation case under chapter 7 of the Bankruptcy Code upon a showing that the debtor has committed fraud in connection with the case.